If you were counting on education tax credits to help defray the cost of college or job training courses, watch out. In a recent budget proposal, Republican leaders in Congress want to eliminate two key tax relief programs for students.
The American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC) provide tax relief—up to $2,500 and $2,000 a year, respectively—for tuition and mandatory fees for millions of students each year. Republicans in the U.S. House of Representatives have proposed eliminating both tax credits, which they claim would save the government $85 billion over 10 years.
With U.S. student loan debt now topping $2 trillion, any financial support is a boon for students. Unfortunately, millions of eligible taxpayers fail to take advantage of the credits. According to the IRS, an estimated $6.3 billion went unclaimed in the 2022 tax season alone, thanks to a combination of students underclaiming or not claiming them at all.
Ending these tax credits would likely impact middle-class and more vulnerable students the most, as the benefits phase out for taxpayers making higher salaries. According to the Bipartisan Policy Center, in 2023 71% of all credit claims and 65% of credit dollars claimed went to those who made less than $100,000.
When average student loan debt stands at over $38,000, per the Education Data Initiative, Americans seeking higher education need all the help they can get. Samuel Handwerger, an accounting lecturer at the University of Maryland and faculty advisor at TerpTax adds that reform, like making the credits more streamlined, could also be advantageous for students.
Understanding the AOTC and LLC education tax credits
Available for four years of higher education, the AOTC provides up to $2,500 in relief for qualified education expenses—these include tuition, fees, and other mandatory items like books or lab equipment. Up to $1,000 of the credit can be refunded to the taxpayer. Students must be pursuing a degree on at least a half-time basis.
The LLC is a tax credit that covers 20% of the first $10,000 of qualified tuition and enrollment fees for students attending most postsecondary institutions for one or more courses. The credit can be used to pay for undergraduate, graduate, or professional courses as well as job skill development courses.
There is also no limit to the number of years the LLC credit can be used—meaning students can use it for as long as it takes them to complete their degrees. The credit is nonrefundable, meaning individuals are eligible for up to $2,000 per return per year to only pay any tax owed to the IRS.
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The LLC has served as an incentive for students to pursue education beyond their four years as an undergraduate, adds Handwerger.
Neither credit can be claimed if one’s modified adjusted gross income (MAGI) is over $90,000 ($180,000 for joint filers).
Why would Congress eliminate the AOTC and LLC tax credits?
The Trump administration has made no secret of its far-reaching plans to reshape the federal government. After ambitious executive orders, the primary means to that end is the federal budget and changes to the tax system.
According to GOP proposals, repealing tax benefits aimed at supporting alternative energy sources and employment retention tax credits could save hundreds of billions of dollars over 10 years. Their proposal asserts that ending the AOTC and LLC would save an estimated $59 and $26 billion, respectively.
However, repealing the education tax credits outright would be an unpopular step as it would have far-reaching impacts on the already expensive proposition of higher education. Students who relied on tax relief for their studies may have to rethink their tax strategy and lean more heavily on student loans to pay their tuition, or set up a payment plan with the IRS to pay back taxes.
In the U.S., the average cost of college is over $38,000 per student per year. As college continues to become more expensive, more students may turn away from the perspective of attending school altogether.
According to Handwerger, reform of the two tax credits is also an alternative. The Bipartisan Policy Center has proposed eliminating the LLC and retaining the AOTC as a single education tax credit.
“Having some type of deduction or some type of tax break for people who are improving their education or skills in the workforce, it would make sense to me that the tax law should encourage that,” says Handwerger.
The takeaway: Tax relief can help you pay for education
As of writing, the wrangling over tax reform has only just begun. Gutting education tax credits—especially without a replacement or reform—will hurt low- and middle-income students. When paired with a proposal to tax scholarship and fellowship income, graduate students will begin to have much greater tax burdens at a time when they are already sacrificing to go back to school.
In the meantime, Handwerger advises individuals to work with tax professionals, as the tax system is inherently complicated and tax credits are easily misinterpreted. Even when it may seem easy to file returns for free using online software, the mistakes can be “horrendous,” he says.
The IRS’s Volunteer Income Tax Assistance program generally provides free help for those making less than $67,000, have a disability, or speak limited English.
More on taxes:
- Did you receive a higher-than-expected tax bill from the IRS? Here are 3 strategies to bridge the gap
- Navigating the IRS alphabet soup: There are nearly two dozen different 1099 forms, we explain them all
- Did you know the IRS taxes your bank account? Don’t get caught off guard
